The Evolution of MoneyBy Anand Shirur

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What does money signify ?

Agenda

The ladder of economic civilization

The second evolutionary step

Gold Standard & Brettons Woods

The third evolutionary step

The fourth evolutionary step

The first evolutionary step

What does Money Signify

Medium for exchange of Value Count of ‘your’ value addition to society Success & Self Esteem It's the center around which world

revolves “ Its all about money, honey”........

Why was Money Invented ?

Specialization of Labour made economic exchange a fundamental necessity

When the division of labor has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labor can supply..

– Adam Smith, Wealth Of Nations

The Ladder of Economic Civilization

Stages in development of moneyBarter tradeCommodity moneyStandardized CoinageRepresentative MoneyFiat MoneyCredit MoneyElectronic Money

Step 1 – Barter Trade

Most primitive form of reciprocal exchange

Barter involves only two people; each has something the other wants

“Hungry weaver is searching for a naked farmer” LimitationsCoincidence of wantsPerishability Inefficient

Commodity Money

Valued Commodity as means of exchange

Early examples – Shells, Food Grains, Cow etc

Evolved into Metallic Money – Durable, Fungible and Portable

The First Evolutionary Step

Standard Coinage Egypt used gold bars in 400 BC Discovery of Touchstone – tool for

assaying value of gold in an alloy Concept of Standard Coinage was

introduced Govt. assertion that value of money lay

in the emblem Debasement of Currency – coin as unit

of value (not weight)

The First Evolutionary Step

The Second Evolutionary Step

Representative Money Token or certificate (made of paper),

backed by an equivalent reserve Started with 'Warehouse Receipts'

issued by ‘Girobanks’ Receipts as medium of exchange Soon receipt issuance overshot actual

reserves to accommodate loan demand Girobanks introduced std accounting

methods & deposit accounts for depositors

The Second Evolutionary Step

Fiat Money Money, not backed by reserves Derives stand-alone value by

government decree Money is a 'Forced / Legal Tender'

Gold Standard – 1901 to 1932

Money system in which regions' common medium of exchange are paper notes freely convertible into pre-set fixed quantities of gold

Gold standard was intended to force monetary prudence by respective govt.

Abandoned due to high war expenses followed by deflation / depression

Brettons Wood – July 1944 Conference after 2nd World War to discuss

financial architecture Resulted in

Formation of IMF and IBRD (World Bank)

Gold was replaced with Dollar as international reserve currency

However dollar was pegged to gold at pre-fixed rate

Currencies were made convertible

The Third Evolutionary Step

Credit Money IOUs, Promissory Notes, Overdraft Exists in conjunction with other forms

of monies Enabled 'Fractional Reserve Banking'

– thereby increasing money supply When over-leveraged, has led to

financial bankruptcies

The Fourth Evolutionary Step

Electronic Money

Internet fund transfers Mobile fund transfers

Thanks